Income Tax Changes Announced in Budget 2026
The Union Budget 2026 brought several changes to India’s direct tax framework through the Income Tax Act, 2025, which came into effect from April 1, 2026. Key measures included reducing TCS to 2% on overseas tour packages and remittances under the LRS, providing an exemption on interest received from motor accident compensation claims, and extending the deadline for filing revised income-tax returns up to March 31. The Budget also introduced a six-month window for small taxpayers to disclose certain foreign assets under the new tax provisions.
Key Direct Tax and Compliance Changes
New Income Tax Law: A simplified Income Tax Act, 2025 came into effect from April 1, 2026, along with redesigned income-tax forms aimed at making compliance easier.
Lower TCS Rates: The Tax Collected at Source (TCS) rate on overseas tour packages and remittances made under the Liberalised Remittance Scheme (LRS) for education and medical purposes has been reduced to a uniform 2%.
TDS and Tribunal-Related Relief: Interest received as compensation through motor accident claims tribunals has been made fully exempt from income tax, along with the related TDS requirement. Depositories have also been permitted to accept Forms 15G and 15H directly.
Extended Return-Filing Period: Taxpayers can now file revised income-tax returns up to March 31 by paying a nominal fee. The regular filing deadlines have also been structured differently, with July 31 applicable to ITR-1 and ITR-2 taxpayers and August 31 for eligible non-audit business cases.
Foreign Asset Disclosure: A one-time six-month disclosure facility has been introduced for small taxpayers and professionals to report certain previously undisclosed minor foreign assets or income. The scheme provides specified relief from penalties and other consequences, subject to the prescribed conditions.
The Union Budget 2026-27 brings two important changes to India’s tax framework. First, the Income Tax Act, 2025 has been formally implemented from April 1, 2026, with an emphasis on simplifying the tax system. Second, changes have been introduced in the Securities Transaction Tax (STT) applicable to Futures and Options (F&O) transactions.
These measures are likely to influence how salaried taxpayers manage their income, savings, and investments, while also affecting the risk-taking behaviour of traders and retail investors in the equity market.
In this article, we look at the income-tax slab changes after Budget 2026 and examine how the Income Tax Act, 2025 could affect salaried individuals. We also discuss the possible impact of the new tax provisions and changes in STT on the Indian equity market following Budget 2026.
A New Phase in Direct Taxation: Income Tax Act, 2025 Comes into Effect
For many years, India’s direct tax system operated under the Income Tax Act, 1961, which had undergone numerous amendments over time. As a result, the law became more detailed and complicated, with lengthy legal provisions that could make tax compliance challenging for businesses as well as salaried individuals.
To make the direct tax system simpler and more contemporary, the government introduced the Income Tax Act, 2025 as a replacement framework. The Union Budget 2026-27 formally announced its implementation, with the new Act coming into force from April 1, 2026. The move is aimed at creating a clearer and more streamlined tax structure for taxpayers.
Key Compliance and Penalty Changes in Budget 2026
The Union Budget 2026 has introduced measures aimed at making tax compliance more convenient for taxpayers. The deadline for filing ITR-1 and ITR-2 remains July 31, while taxpayers covered under non-audit business cases and certain trusts will have until August 31 to submit their returns. In addition, taxpayers will be allowed to file revised income-tax returns up to March 31 by paying a nominal fee, giving them additional time to correct errors or update information in their original returns.
Measures to Reduce Tax Litigation and Compliance Burden
To minimise lengthy tax disputes and prevent taxpayers from facing repeated notices over relatively small compliance issues, Budget 2026 proposes several changes:
No interest on penalties during appeals: Interest on penalty amounts would not be charged while an appeal is pending.
Lower appeal pre-deposit: The amount required to be deposited before filing an appeal would be reduced from 20% to 10% of the disputed tax demand.
Opportunity to update returns: Taxpayers would be permitted to update their returns even after reassessment proceedings have started, subject to payment of an additional 10% tax.
Relief in misreporting cases: Taxpayers may receive immunity in certain misreporting matters by paying 100% additional tax, subject to the prescribed conditions.
Fixed fees for technical defaults: Certain procedural lapses, such as delays in audits or reporting-related mistakes, would be dealt with through fixed fees instead of penalties.
Simpler treatment of offences: Minor violations would primarily attract monetary penalties, while serious offences would have graded prosecution provisions, with the maximum imprisonment proposed to be reduced to two years.
One-Time Foreign Asset Disclosure Opportunity
Budget 2026 also proposes a one-time, six-month disclosure window for certain taxpayers to report previously undisclosed foreign assets or income. The measure could particularly help students, technology professionals, NRIs who have relocated abroad, and other professionals who may have missed reporting requirements relating to their overseas assets or income.
Undisclosed foreign income or assets valued at up to ₹1 crore can be brought into the tax system by paying 30% of the fair market value as tax, along with an additional 30% tax. For cases involving amounts of up to ₹5 crore, taxpayers can settle the matter by paying a ₹1 lakh fee, subject to the applicable conditions. Both options come with specified immunity from further tax-related consequences.
In addition, taxpayers will not face a penalty for failing to disclose certain non-immovable foreign assets valued below ₹20 lakh. This relief will have retrospective effect from October 1, 2024, providing immunity for eligible past non-disclosures.